The manufacturing sector plays a pivotal role in the development and growth of an economy due to its forward and backward linkages with other sectors. Economic activity in Johannesburg can also lead to benefits across southern Africa (“the region”) where firms in Johannesburg are key suppliers. To maximise the gains from the linkages, it is important to have an understanding of the nature of economic activity and the operational challenges that firms face. The Centre for Competition, Regulation and Economic Development (CCRED) research on the nature of industrial activity in the City of Johannesburg provided important insights on industrial activity, firm performance and constraints to growth and competitiveness for firms in Johannesburg.
With the exception of the inner city survey of Johannesburg that was carried out in 1995, further research using primary data to explore economic activity in this region has been relatively limited. Administrative, enterprise and investment climate surveys1 regularly carried out are often skewed by the head office effect2 and do not equip metropolitans and municipalities with adequate information to design business growth interventions. The CCRED survey contributes to filling this gap and supporting the development of evidence-based interventions.
The research process entailed three approaches: census, survey and in-depth interviews. The census collected basic information regarding existing businesses in Johannesburg as there was no reliable record of businesses to survey. The survey of the industrial areas was carried out between 2015 and 2016.3 The response rate was 34% with 5214 firms responding. In order to corroborate the survey findings, 45 in-depth interviews were undertaken with selected manufacturing and manufacturing-related firms.
Nature of industrial activity
Since the 1995 survey economic activity in Johannesburg, which largely comprised manufacturers such as clothing, printing and publishing, and jewellery and diamond cutting, has evolved somewhat towards more sophisticated manufacturing. The shift was largely driven by the then growing mining sector. Technologically advanced manufacturing of machinery and equipment, fabricated metal products, furniture, machinery and equipment, and plastic products supported mining and mining-related firms in the City. The decline of mining activity in Johannesburg has seen firms supplying this industry being negatively affected. These firms would require assistance to enter alternative markets in other SADC countries where mining has shown stronger growth.
Manufacturing activity in Johannesburg varies by industrial node. The largest sectors in the industrial nodes identified from the census are manufacturing of machinery and equipment; wood and wood products; electrical machinery and equipment; iron and steel; and furniture and jewellery. These are also the sectors which responded the most to the survey indicating minimal response bias. While some industrial nodes have a clear specialisation, in the case of Nancefield (furniture), Devland (food production) and Strijdom Park (machinery and equipment), other nodes are diverse. For example, Marlboro and Wynberg have an assortment of products being manufactured.
Johannesburg has a significant concentration (approximately 85%) of small businesses employing fewer than 200 employees and with an annual turnover of less than R50 million. 50% of firms have been located at their current premises for less than 10 years, and 65% of these have been there for less than five years. This stresses the importance of regular firm monitoring. Despite the difference in size of the firms which responded to the survey, firm performance was not dependent on firm size.
Firm performance between 2013 and 2015
The economic climate in South Africa has been challenging for the past three years, with economic growth averaging at 1.7% between 2013 and 2015. During this period, the value of the rand was volatile and significantly devalued against the dollar. The volatility meant it was challenging for firms to anticipate costs and to price accordingly. Importers of key essential inputs experienced an increase in cost of inputs, while some exporters of goods made unexpected gains. Nonetheless, firms surveyed were performing better than anticipated measured in terms of changes in annual revenue. Less than 25% of the firms recorded a decline in annual revenue, 33% were stable and 43% reported some growth. The main reasons for poor performance amongst firms that reported contraction or static growth were weak customer demand and lost sales to foreign and domestic competitors (linked to cheaper imports). Other reasons cited included the weak economic climate as customers opted for cheaper alternatives, including cheaper imports, as a result of lower disposable income.
Improving firm growth and competitiveness
The information collected demonstrates that there is a relationship between performance and capacity utilisation where firms utilising capacity by more than 75% were likely to be growing and firms at 50% capacity utilisation or less, were less likely to grow. Firms that exhibited growth were investing in new production processes, machinery and equipment, development of new products and increasing export competitiveness.
The explanations for better performance with higher capacity utilisation and investment appear to be straightforward. Higher capacity utilisation lowers unit costs which increases competitiveness. Investments are akin to innovation where firms are able to produce new or better products through better manufacturing processes thus becoming more competitive and meeting consumer needs.
However, acquiring machinery and equipment requires financing such that access to finance, especially government incentives, would assist firms in improving performance and competitiveness. This is especially important given that these are small firms who find it difficult to access private financing.
Significant differences in performance and capacity utilisation were identified in the sectoral-grouping analysis. CCRED research corroborates the fact that the differentials in the sector-grouping growth dynamics are partly influenced by the demand in the region. Furniture, food, cement and rubber products were more likely to be growing compared to fabricated metal products, machinery and equipment and plastic products.
Furniture, food, cement and rubber are in high demand due to rapid urbanisation in the region which also drives demand for food and construction products.5 The drop in commodity prices had an adverse impact on the mining industry which resulted in lower demand of mining-related products and thus poor performance of firms manufacturing fabricated metal products, machinery and equipment and plastic products.
Public services provision and skills
Though the weakness of the economy more broadly negatively affects firms’ growth, there are various location issues that either increase firms’ costs or reduce the efficiency of their operations. These include, but are not limited to, intermittent electricity supply, poor road infrastructure, poor provision of public transport, crime, and lack of technical skills.
Access to reliable power supply is expected to improve once the Medupi and Kusile power stations come online, which when finished will each supply 4800 MW of capacity. The onus will be on the local governments to ensure that substations are maintained to ensure reliable provision of electricity and avoid unnecessary (or unplanned) disruptions. To curb some of the losses from power outages, many firms have purchased generators, which is an added expense.
The most sought-after skills in the manufacturing sector are engineers, production managers and artisans. Firms are struggling particularly to find and recruit artisans. Many firms feel that there is a ‘disconnect’ between skills required in the manufacturing sector and the skills obtained through Technical and Vocational Education and Training (TVET) colleges and SETA-accredited courses. In light of these challenges, the majority (70%) of firms hire people without the required skills and provide training. However, firms are likely to under-invest in training as there is always the risk that trained employees will move to other companies. This is indicative of a basic market failure which is inhibiting employment creation.
The ability of firms to match shift patterns with fluctuations in customer demand is key for firms since transport availability affects operational efficiency and productivity. Improvements in the reliability and flexibility of public transport would lower these costs and allow firms to increase production and performance. Public transport is important in light of the fact that most employees use minibus taxis to commute to and from work which do not have flexible operating hours. Companies generally do not provide transport to employees though some firms offer subsidised transport on night shifts in the event of transport strikes or other public transport interruptions. In general, the considerable investment in public transport within the City, appears to be falling short of business needs.
Importance of firm-level surveys
Firm-level surveys are key instruments for understanding economic activity at a local and provincial level. They provide key insights into firms’ operating environment and challenges that administrative and enterprise surveys would otherwise miss. This tool then equips local governments to design interventions that are critical to the growth and development of not only the manufacturing sector, but all other spheres of industry and the entire economy. The next iterations of the survey will assist policy makers to determine the impact of interventions and monitor business performance over time.